U.S. Budget Deficit Gets Scarier

By

Gene Epstein

April 17, 2015 10:02 p.m. ET

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The true tax burden, as economist Milton Friedman once pointed out, is measured not just by what is labeled as taxes, but by the total amount that government spends, which reflects the real extent to which it taxes our resources.

To see why spending is the better measure of our tax burden, imagine that taxes fell, but spending soared, with the widening gap financed through greater borrowing and printing. We might doubt that our taxes had diminished in any real sense. Those principles apply, and then some, to the federal government’s present and future fiscal realities.

The U.S. Treasury does not record how much of its spending comes from printed money, but it does track the broad categories of spending, taxing, and borrowing. Last week—in an ironic coincidence, just two days before the April 15 filing deadline for income taxes—the news wasn’t good, at least not for those of us concerned about Treasury borrowing that keeps adding to the burdensome federal debt.

Over the past several years, the gap between tax revenue and spending has been unusually wide. In fiscal year 2009, coinciding with the Great Depression, federal receipts as a share of nominal gross domestic product ran 14.6%, then a 69-year low, while outlays came to 24.4%, a 74-year high. Accordingly, the budget deficit in FY ’09 ran a stunning $1.4 trillion, triple its previous record, which had been set the year before.

The deficit has since been in a gradual decline, finally falling below $1 trillion for the first time in FY 2013 and declining again in 2014. In his 2014 State of the Union Address, President Obama took credit for the fact that the budget deficit had been “cut by more than half.” So we can assume he realized that, whatever could be said about the economic stimulus from trillion-dollar deficits when the economy was pulling out of recession, for the government to live so far beyond its means was no longer such a good idea after the economy had recovered.

In fact, the nonpartisan Congressional Budget Office has been warning that surging debt and deficits could eventually destabilize the economy. The deficit in 2015 will also be down by more than half against the 2009 peak of $1.4 trillion. But the Treasury reported last week that the downtrend now seems to be reversing. In the first six months of the 2015 federal fiscal year, from October through March, the deficit was up 6% from the six-month level a year earlier.

The news was unexpected. As recently as last month, the CBO had projected no further decrease in the deficit in FY 2015, but no increase. Based on last week’s report from the Treasury, the CBO was wrong, mainly because it underestimated the increase in spending. If the last six months of the fiscal year run similar to the first six months, the deficit for the full year will start rising again.

THIS UPTICK IN THE DEFICIT may seem no bigger than a man’s hand. But it’s part of a long-term trend much larger than us all.

With all the accumulated borrowing that has occurred since the financial crisis of 2008, Treasury debt held by the public has soared. As a share of nominal gross domestic product, it more than doubled, from 35.2% in 2007 to 74.1% in 2014. While last month the CBO projected this ratio to be around flat in 2015, it will probably revise that estimate up by a percentage point, given the likely rise in the deficit.

Even that would be no great cause for concern, were it not for the gathering debt storm over the next 25 years. Ironically, in its most recent 10-year projection, the CBO delivered what seemed to be good news. The agency revised its estimate of the cost of the Affordable Care Act down by more than $400 billion, a revision that seemed large enough to quiet fears about burgeoning debt.

But the effect on the CBO’s 10-year projections was trivial, given the magnitude of the nation’s debt. According to the agency’s “Baseline Budget Projections,” the downward revision in ACA costs means the debt-to-GDP ratio will rise to 77.1% by 2025, rather than the previously estimated 78.7%. That would barely alter the CBO’s scary 25-year projections, released last year. (See “New Warning on U.S.’s Gathering Debt Storm,” Economic Beat, July 21, 2014.) According to its “Extended alternative fiscal scenario,” which essentially consists of informed judgments on how the budget situation could play out in the real world of politics, the debt-GDP ratio could surge to 183% by 2039.

That unheard-of debt level could trigger a fiscal crisis, as the CBO keeps warning. And given the trends in baby-boomer retirements, combined with the full cost of elder-care entitlements, that crisis could occur, unless something is done.

U.S. Budget Deficit Gets Scarier

The true tax burden, as economist Milton Friedman once pointed out, is measured not just by what is labeled as taxes, but by the total amount that government spends, which reflects the real extent to which it taxes our resources.

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